Answer to Question #158764 in Macroeconomics for Arsalan

Question

COVID-19 all around the world has restricted the economic activity. To stop the spread of the virus Pakistan like many other countries adopted the policy of smart lockdown. Shutting down of the industry has created adverse supply shock in the economy. While, the slowdown in business and economic activities the country is in the recessionary phase of the business cycle as the GDP growth for the FY 2020-21 is expected to be -0.2 accompanied by high unemployment and poverty rate.

a.     Reflecting on the above situation justify whether the State Bank of Pakistan should opt for easy or tight monetary policy as a stabilization policy. Also illustrate it graphically. 

                                                          

Reflecting on the above situation justify whether the Government of Pakistan should opt for expansionary or contractionary fiscal policy as a stabilization policy. Also illustrate it graphically.    

Answer 1

Reflecting on the above situation the State Bank of Pakistan should opt for easy monetary policy as a stabilization policy to stimulate the increase in aggregate demand and total output.

Reflecting on the above situation the Government of Pakistan should opt for expansionary fiscal policy as a stabilization policy to stimulate aggregate demand too to push the economy and output level to close the recessional gap.